Beware of the Hidden Dangers of Lease Financing

When school officials consider purchasing new equipment (e.g., buses, copiers, or tablets), vendors sometimes offer financing packages that use a lease purchase agreement (LPA) or other financing lease with a third-party leasing company.

LPAs are different from true leases and rental agreements. Un­like a true lease, an LPA transfers equipment ownership to the school. In exchange, the school pledges general fund dollars to make lease payments over time, which include interest that the leasing company treats as tax-exempt. The leasing company of­ten holds a security interest in the equipment and may reclaim it if the school fails to make the lease payments.

We strongly recommend that our clients avoid financing leases, as LPAs often include unfavorable, or even illegal, terms. We frequently encounter the following problematic provisions in LPAs:

  • The school must pay closing fees, document processing fees, and other hidden fees;
  • The leasing company is authorized to unilaterally increase monthly payments without the school’s consent;
  • The school must pay the leasing company’s attorney fees and collection fees if a default or dispute occurs;
  • The school must indemnify the leasing company for the company’s losses, which is prohibited by Michigan law;
  • The school must pay personal property taxes on the equipment (despite having tax-exempt status, a school may be assessed if the leasing company incorrectly reports the equipment to the local assessor);
  • The school waives its right to a jury trial;
  • The school waives its statutory rights and remedies, such as the ability to revoke ac­ceptance of latently defective equipment;
  • If a default occurs, the leasing company may: (1) charge the school excessive late fees, (2) charge the school default interest, (3) re­possess the equipment, (4) continue to re­quire the school to make lease payments, and (5) impose personal liability on the school official who signed the contract;
  • The school may be required to pay service charges (e.g., copier maintenance fees) to the leasing company even if the vendor goes out of business;
  • The person signing the LPA may be agreeing to assume personal liability in the event of default by the school;
  • The leasing company may collect school officials’ contact information and send tele­marketing calls and spam emails; and
  • A default may occur for minor issues, such as misspellings or immaterially incomplete information in the agreement, entitling the leasing company to the above remedies.

Vendors and leasing companies usually are not familiar with laws affecting Michigan schools, resulting in the LPA provisions that may violate state law or federal tax law. In most cases, those errors are not discovered until late in the process when le­gal counsel reviews the financing documents, and correcting those errors may cause significant delay. Because most leasing compa­nies are reluctant to change their form documents, school officials may be left with the difficult decision to either delay equipment delivery to secure alternative financing or sign an unfavorable and potentially unlawful agreement.

To avoid these common pitfalls associated with equipment financing, school officials are advised to contact their school’s attorney to discuss available options at least six weeks before the anticipated equipment delivery date. Instead of an LPA, we recommend financing equipment through an installment purchase agreement (IPA) financed through a local bank. Thrun Law Firm can assist school officials with soliciting bids from local banks to finance equipment through an IPA. The IPA documents are prepared by our office, have favorable terms for schools, and are widely accepted by banks and financial institutions throughout Michigan.

As a final note, if a school has an outstanding bond issued since 2019, the school also may have a continuing disclosure obligation arising from either a new LPA or an IPA. School officials should review the possible obligation with bond counsel. For Thrun Policy Subscribers, see Policy 3212 (Post-Issuance Disclosure Compliance).